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SLM > SEC Filings for SLM > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for SLM CORP


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q.

This report contains "forward-looking statements" and information based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A "Risk Factors" and elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"), in the first and second Quarterly Reports on Form 10-Q, this Quarterly Report on Form 10-Q and subsequent filings with the SEC; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the Company is a party; credit risk associated with the Company's exposure to third parties, including counterparties to the Company's derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The Company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and restructuring initiatives and adverse effects of such initiatives on its business; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; and changes in the demand for debt management services. The preparation of the Company's consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. The Company does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in its expectations.

Definitions for certain capitalized terms used in this document can be found in the 2011 Form 10-K.

Certain reclassifications have been made to the balances as of and for the three and nine months ended September 30, 2011 to be consistent with classifications adopted for 2012, and had no effect on net income, total assets, or total liabilities.

Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.


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Selected Financial Information and Ratios



                                                                  Three Months Ended                    Nine Months Ended
                                                                     September 30,                        September 30,
(Dollars and shares in millions, except per share data)         2012              2011               2012              2011
GAAP Basis
Net income (loss) attributable to SLM Corporation             $     188         $     (47 )        $     591         $     122
Diluted earnings (loss) per common share attributable
to SLM Corporation                                            $     .39         $    (.10 )        $    1.18         $     .21
Weighted average shares used to compute diluted
earnings (loss) per share                                           471               511                490               526
Return on assets                                                    .42 %            (.10 )%             .43 %             .09 %

"Core Earnings" Basis(1)
"Core Earnings" attributable to SLM Corporation               $     277         $     188          $     804         $     708
"Core Earnings" diluted earnings per common share
attributable to SLM Corporation                               $     .58         $     .36          $    1.61         $    1.32
Weighted average shares used to compute diluted
earnings per share                                                  471               517                490               526
"Core Earnings" return on assets                                    .62 %             .39 %              .59 %             .49 %

Other Operating Statistics
Ending FFELP Loans, net                                       $ 127,747         $ 140,659          $ 127,747         $ 140,659
Ending Private Education Loans, net                              37,101            36,157             37,101            36,157

Ending total student loans, net                               $ 164,848         $ 176,816          $ 164,848         $ 176,816

Average student loans                                         $ 167,166         $ 178,620          $ 171,499         $ 181,242

(1) "Core Earnings" are non-GAAP financial measures and do not represent a comprehensive basis of accounting. For a greater explanation of "Core Earnings," see the section titled "'Core Earnings' - Definition and Limitations" and subsequent sections.

Overview

Our primary business is to originate, service and collect loans we make to students and/or their parents to finance the cost of their education. The core of our marketing strategy is to generate student loan originations by promoting our products on campus through the financial aid office and through direct marketing to students and their families. We also provide servicing, loan default aversion and defaulted loan collection services for loans owned by other institutions, including ED. We also provide processing capabilities to educational institutions, 529 college savings plan program management services and a consumer savings network. In addition, we are the largest holder, servicer and collector of loans made under FFELP, a program that was discontinued in 2010.

We monitor and assess our ongoing operations and results based on the following four reportable segments:

Consumer Lending Segment - In this segment, we originate, acquire, finance and service Private Education Loans. The Private Education Loans we make are largely to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or borrowers' resources. In this segment, we earn net interest income on the Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, which are primarily late fees. As of September 30, 2012 and December 31, 2011, we had $37.1 billion and $36.3 billion, respectively, of Private Education Loans outstanding.


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Business Services Segment - In our Business Services segment, we provide loan servicing for our FFELP Loans, ED and other third parties. Sallie Mae is the nation's largest servicer of student loans, managing or servicing a portfolio of approximately $250 billion as of September 30, 2012. We provide default aversion and contingency collections work on behalf of ED, Guarantors of FFELP Loans, and other institutions. Our Campus Solutions business provides comprehensive transaction processing solutions and associated technology to college financial aid offices and students to streamline the financial aid process. We provide 529 college savings plan account asset servicing and other transaction processing activities. We offer tuition, renters and student health insurance to college students and higher education institutions.

FFELP Loans Segment - Our FFELP Loans segment consists of our $127.7 billion FFELP Loan portfolio at September 30, 2012 and the underlying debt and capital funding these loans. Because we no longer originate FFELP Loans, the portfolio is in runoff and is expected to amortize over approximately the next 20 years with a weighted average remaining life of 7.7 years.

We actively seek to acquire FFELP Loan portfolios to leverage our servicing scale and expertise to generate incremental earnings and cash flow. Of our total FFELP Loan portfolio at September 30, 2012, 95 percent was funded with non-recourse, long-term debt; 80 percent of our FFELP Loan portfolio being funded to term by securitization trusts, 10 percent funded through the ED Conduit Program which terminates on January 19, 2014, and 5 percent funded in our multi-year ABCP facility. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP Loan portfolio amortizes.

Other - Our Other segment primarily consists of the financial results related to activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment.

Recent Developments

Many aspects of our businesses are subject to federal and state regulation and administrative oversight. This year, as the Consumer Financial Protection Bureau (the "CFPB") becomes fully operationalized and various other regulatory agencies continue developing new rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the probability of new or additional regulatory requirements or oversight being applied to our various businesses (most notably, private student lending, default aversion and debt collection) or, generally, to large non-bank financial services companies will likely increase.

CFPB Supervision of Large Debt Collectors

On October 24, 2012, the CFPB issued its final debt collection larger participant rule and examination procedures that will allow the agency to federally supervise larger consumer debt collectors for the first time. The rule defines larger participants as third-party debt collectors, debt buyers, and collection attorneys with more than $10 million in annual receipts resulting from consumer debt collection. Under the rule, certain of our collection subsidiaries would be classified as larger participants. The rule is effective January 2, 2013.

Key Financial Measures

Our operating results are primarily driven by net interest income from our student loan portfolios (which include financing costs), provisions for loan losses, the revenues and expenses generated by our service businesses, and gains and losses on loan sales and debt repurchases. We manage and assess the performance of each business segment separately as each is focused on different customers and each derives its revenue from different activities and services. A brief summary of our key financial measures (net interest income; provisions for loan losses; charge-offs and delinquencies; servicing and contingency revenues; other income (loss); operating expenses; and "Core Earnings") can be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2011 Form 10-K.


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First Nine Months of 2012 Summary of Results

We continue to operate in a challenging macroeconomic environment marked by high unemployment and financial uncertainty which contributes added uncertainty to Private Education Loan repayment and default patterns. Our business has changed significantly over the past two years as we no longer originate FFELP Loans. A detailed discussion of these changes can be found in Item 1 "Business" and in Item 1A "Risk Factors" in our 2011 Form 10-K.

Nonetheless, we were able to achieve significant accomplishments during the third quarter of 2012 as discussed below.

We report financial results on a GAAP basis and also present certain "Core Earnings" performance measures. Our management, equity investors, credit rating agencies and debt capital providers use these "Core Earnings" measures to monitor our business performance. See "'Core Earnings' - Definition and Limitations" for a further discussion and a complete reconciliation between GAAP net income and "Core Earnings."

Third-quarter 2012 GAAP net income was $188 million ($.39 diluted earnings per share), versus a net loss of $(47) million ($(.10) diluted loss per share) in the third-quarter 2011. The changes in GAAP net income are driven by the same types of "Core Earnings" items discussed below as well as changes in "mark-to-market" unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP but not in "Core Earnings" results. Third-quarter 2012 and 2011 GAAP results included losses of $140 million and $371 million, respectively, resulting from derivative accounting treatment which is excluded from "Core Earnings" results.

"Core Earnings" for the quarter were $277 million ($.58 diluted earnings per share), compared with $188 million ($.36 diluted earnings per share) in the year-ago quarter. Earnings improvement was primarily due to a $139 million lower loan loss provision largely attributable to the adoption of new accounting guidance for troubled debt restructurings ("TDRs") in the year-ago quarter. Also, debt repurchase gains were $44 million higher and operating expenses were $41 million lower. Net interest income was $40 million lower primarily due to higher funding costs which were partly due to refinancing debt into longer-term liabilities and lower federally guaranteed student loan balances.

During the first nine months of 2012, we:

issued $6.9 billion of FFELP asset-backed securities ("ABS"), $3.2 billion of Private Education Loan ABS and $2.65 billion of unsecured bonds;

repurchased $520 million of debt and realized "Core Earnings" gains of $102 million, compared with $894 million of debt repurchased and $64 million of gains in the first nine months of 2011;

amended our FFELP asset-backed commercial paper facility to increase the current amount available to $7.5 billion and extended the final maturity date by one year to January 9, 2015;

repurchased 48.2 million common shares for $730 million on the open market as part of our previously announced share repurchase program authorization of up to $900 million; and

increased our regular quarterly common stock dividend to $.125 per share, up from $.10 per share in the fourth quarter of 2011. We paid our quarterly dividends on March 16, 2012, June 15, 2012 and September 21, 2012.

2012 Management Objectives

In 2012 we have set out five major goals to create shareholder value. They are:
(1) prudently grow Consumer Lending segment assets and revenue; (2) sustain Business Services segment revenue; (3) maximize cash flows from FFELP Loans;
(4) reduce our operating expenses; and (5) improve our financial strength. Here is how we plan to achieve these objectives and the progress we have made to date:


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Prudently Grow Consumer Lending Segment Assets and Revenues

We will continue to pursue managed growth in our Private Education Loan portfolio in 2012, currently targeting at least $3.2 billion in new originations for the year compared to $2.7 billion in 2011. We will also be increasing our efforts to improve our return on these assets. We expect further improvements in our charge-off rates and provision for loan losses as the quality of our Private Education Loans continues to improve. Originations were 25 percent higher in the third quarter of 2012 compared with the year-ago quarter. Charge-offs decreased to 3.23 percent (annualized) of loans in repayment from 3.74 percent in the year-ago quarter. Provisions for loans losses decreased to $252 million in the third quarter of 2012 compared to $384 million in the third quarter of 2011.

Sustain Business Services Segment Revenue

Our Business Services segment generates the vast majority of its revenue from servicing and collecting on our FFELP Loan portfolio and FFELP Loans for others. As a result of the elimination of FFELP in 2010, servicing and collection revenues derived from FFELP-related sources are in decline. In 2012 we will work to offset these declines through two primary means - pursuing additional growth and expansion of our non-FFELP-related servicing and collection businesses and seeking to increase the FFELP-related loan servicing and collection work we do for third parties. In 2012 we are targeting significant growth in the number of customers we service for ED under our ED servicing and collection contracts, as well as in the total assets under management in our 529 college savings plans. We will explore both complementary and diversified strategies to expand demand for our services in and beyond the student loan market. We will also more aggressively seek to leverage our existing FFELP servicing platforms to be able to provide lower cost FFELP servicing to others while increasing segment revenues from these sources. For the nine months ended September 30, 2012, our Business Services segment revenue is down one percent from the year-ago period primarily due to the amortization of our FFELP Loan portfolio. We are continuing our efforts to offset this decline by growing other sources of revenue. Below are examples of growth in other Business Services activities:

We are currently servicing approximately 4.1 million accounts under the ED Servicing Contract as of September 30, 2012 compared to 3.4 million accounts at September 30, 2011. Market share under the ED Servicing Contract is set annually based on the performance rankings of the four servicing companies that are parties to the contract. For the current contract year ending August 15, 2013, our allocation of new customer loans awarded under the ED Servicing Contract was 15 percent. We must remain focused on improving our performance relative to other servicers to increase our allocation for the next contract year.

Campus Solutions added 19 new refund disbursement clients in the first nine months of 2012.

Assets under management in 529 college savings plans totaled $43.1 billion at September 30, 2012 and grew 25 percent over the year-ago quarter.

Maximize Cash Flows from FFELP Loans

In 2012 we will continue to focus on opportunistically purchasing additional FFELP Loan portfolios from other lenders. As cash flows from our existing FFELP Loans decline over coming years, it also becomes increasingly important that we actively manage and continue to reduce operating and overhead costs attributable to the maintenance and management of this segment. Continuing to reduce these operating and overhead costs will also increase net income for our Business Services segment. During the first nine months of 2012, we purchased $3.1 billion of FFELP Loans. We expect to make additional purchases during 2012. These acquisitions helped partially offset the approximately $5 billion of loans that were consolidated to ED in 2012 as part of the Special Direct Consolidation Loan Initiative. See "FFELP Loans Segment" for further discussion regarding the effect of the Special Direct Consolidation Loan Initiative. The Special Direct Consolidation Loan Initiative impact will not be material to future earnings or cash flows. We will continue to actively and aggressively seek to acquire additional portfolios.


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Reduce Operating Expenses

We achieved our 2011 management objective of having a quarterly operating expense of $250 million or less in the fourth quarter of 2011. We will remain focused on reducing operating expenses in 2012 and expect to improve on the $1.1 billion of operating expenses incurred in 2011. Third-quarter 2012 operating expenses were $244 million, down from $285 million in the year-ago quarter primarily due to the current-year benefit of the cost-cutting efforts we implemented throughout 2011. For the nine months ended September 30, 2012, our operating expenses were $743 million.

Improve Our Financial Strength

It is management's objective for 2012 to provide increased shareholder distributions while at the same time ending 2012 with a balance sheet and capital position as strong as or stronger than those with which we ended in 2011. We increased our regular quarterly common stock dividends to $0.125 per share in the first, second and third quarters of 2012, up from $0.10 per share for the last three quarters of 2011. During the second quarter of 2012, we authorized an additional $400 million to be utilized in our ongoing share repurchase program; we previously authorized $500 million in January 2012. During the first nine months of 2012, we repurchased 48.2 million shares of common stock at an aggregate price of $730 million. At September 30, 2012, we had $170 million of remaining share repurchase authorization.


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RESULTS OF OPERATIONS

We present the results of operations below first on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We have four business segments: FFELP Loans, Consumer Lending, Business Services and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a "Core Earnings" basis (see "'Core Earnings' - Definition and Limitations").

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